India Ratings affirms AAA to SBI, PNB; outlook stable

India Ratings has affirmed the State Bank of India's long-term issuer rating at 'AAA' with a 'stable' outlook on the back of its strong funding profile supported by large branch network.

The agency has also affirmed Punjab National Bank's long-term issuer rating at 'AAA' with a stable outlook and its short-term issuer rating at A1+.

"The rating is driven by SBI's competitive edge as the largest bank with a fundamentally strong funding profile supported by its large pan-India branch network, higher income diversity than most other public sector banks, comfortable capitalisation and reasonable profitability," the rating agency said on Thursday.

It also said despite the asset quality under cyclical stress, the average credit costs over the cycle would not be significantly different from other strong public sector banks.

On PNB, the report said, "the ratings are driven by expectations of extraordinary support from its majority and controlling shareholder (the government holds 56% stake), in case of a systemic crisis, due to its high importance," the report said.

According to the report, SBI's rating decision is also supported by the high probability of extraordinary government support if required due to the systemic importance of the largest lender.

"The rating is also supported by the high probability of extraordinary government support if required, given the bank's huge systemic importance," it said, adding the bank has 14,388 branches and is the sole banker in many economically backward geographies.

On asset quality, which has deteriorated in the recent past, the agency said the asset quality is likely to stabilise next fiscal with incremental bad loans likely to moderate in the near-term on the back of greater stress on credit risk in lending along with possible turnaround in the economy.

The report, however, said, "....the bank is likely to continue to demonstrate greater cyclicality given some of the policy roles that the bank performs."

The report also pointed out that restructuring in infra assets is likely to gain momentum as RBI's draft guidelines of doing away with restructuring for non-infra loans post FY15 come into affect.

The report, however, noted that high level of restructuring in mid and large corporates is offset by the better performing retail and international portfolio.

"While restructuring is high in the bank's large corporates and mid-corporates segments, the overall impact is offset by its better performing retail and international portfolio," the report said, adding total NPAs and restructured assets at 7.6% remained comparable to other large peer government banks.

Referring to funding, it noted that funding is amongst the strongest in the system, supported by a strong, stable, low-cost retail deposit franchise.

"The bank's savings account ratio of 38.1% is the highest in the system and is supported by its large network. However, current account deposit accretion is weak and declined 25% y-o-y in FY12," it said.

Referring to capitalisation, the report said the bank is comfortable and comparable to other large state-run banks with a tier-I capital of 9.1% in FY12.

"In our estimate, the bank would be required to raise Rs. 64,700 crore of tier-1 capital, most of which though is back-ended, to comply with the Basel III requirement over the transition period," it said, adding the requirement may go up to Rs. 1.27 trillion, depending on the solvency buffers imposed by RBI, reflecting its systemic importance in the system.

The report also said SBI's profitability is average despite strong net interest margin of 3.9% in FY12 due to high operating costs and volatile credit costs.

"NIM was under pressure in FY13 due to tighter liquidity (increasing cost of funds) and lower yields on advances (due to interest reversals and higher growth in lower yield loans)," the report said, adding provisions for wage revision could have 4 bps negative impact on return on asset, which stood at 0.9% in last fiscal.

On PNB, which is the third largest PSB, the report said the rating reflects the bank's strong stress tolerance capability, which protects it from cyclical asset quality pressures and risk from concentration in infrastructure sector, especially power.